Evaluating Long Term Care Insurance

Dear Relaxing Retirement Member,

In my last Retirement Coach Strategy of the Week, we discussed the change in financial risks you face as you move through your retirement years.

Earlier in your life, the financial risk to your family of you passing away was enormous. Over time, as your kids moved out on their own, your mortgage was paid off, and your Retirement Bucket™ grew, that financial risk diminished greatly.

At the same time, however, the financial risk of paying for your health care increases with age, especially if you need extensive care in an assisted living facility, at home, or in a nursing home.

The costs for care now approach $13,000 per month in Massachusetts.

One option is to qualify for government assistance through Medicaid. However, as we discussed, this is extremely difficult for anyone who has accumulated assets over their lifetime, i.e. all of our Relaxing Retirement members.

As one of our members pointed out after last week’s edition, there are very few attorneys who know what they’re doing in this arena.

If you or your loved one are on the doorstep of needing care right now, find a Medicaid/Estate Planning specialist who has extensive experience filing Medicaid applications through the complicated system. Make sure they will walk your application through the system to completion.

Longer Term Planning

If you don’t need care right now, then you have some significant long term planning issues to consider.

I recognize that this is not the easiest topic to discuss, especially for those of you who are currently caring for your spouse or your parents.

At the same time, however, I think it’s a good idea to evaluate all of your financial risks on an annual basis so that you can continually make educated financial decisions.

Many of our members purchased long term care insurance in the past, and sadly, five members are currently using those benefits. Incredibly sad because their health has declined to the point where they need care in a nursing home or Alzheimer’s specialty facility.

The good news in each of those situations is their long term care insurance is paying for their care and their assets have remained intact.

If you have not purchased long term care insurance yet, but you believe you need to consider it to manage your risk, then there is a very important process that I recommend for you.

What to Focus on First

Before you jump in to the “insurance policy” discussion, you have to understand who you’re dealing with and what their agenda is.

Insurance companies and their agents are doing a great job out there stirring the pot about long term care insurance. This is good and bad for you.

All too often, I’ve witnessed individuals and couples beginning the conversation about long term care at “Point Five” when they really need to take a GIANT step back to “Point One”.

One of the reasons why they begin at Point Five is because an insurance agent has rushed right into the bells and whistles of a particular long term care insurance policy before even diagnosing why you should even be thinking about any of this in the first place.

Or, if you even need to.

Not to pick on insurance agents, but they have an axe to grind. They don’t get compensated until you buy a policy and pay the premium, so there’s some urgency on their part to move the process along at a faster pace than what may be in your best interest.

However, this is too important to rush through, so let’s take step back for a moment and walk through a real life case scenario to clarify what you must know first:

  • Don and Claire are 66 years old,
  • They’re now both retired, so they receive no income from work,
  • They’ve done their homework and created a comprehensive Retirement Blueprint™ which illustrates the following:

    • They receive $3,800 per month from social security, and $2,200 per month from pensions for a total income of $6,000 per month
    • On the spending side, they’ve done their homework and calculated that they need $11,000 per month to live exactly the way they want, including paying income taxes, taking vacations, and buying loads of presents for their grandkids
    • Given their social security and pension income, they need an additional $5,000 every month, or $60,000 per year, from somewhere else,
    • They’ve done a nice job saving, and their Retirement Bucket, which includes all of their liquid savings and investments they’ve accumulated over the years, including IRAs, 401(k)s, and non-IRA accounts amounts to $2.35 million
    • Their Retirement Resource Forecasters™ illustrate that Don and Claire have enough money in their Retirement Bucket™ to provide them with that $60,000 per year including annual increases to keep pace with inflation.
    • They can achieve this without having to hit home runs with their investments. In other words, they can accomplish this without subjecting themselves to loads of investment volatility

Now, the scenario I’ve just described to you with Don and Claire is precisely where I recommend you begin to have the long term care insurance conversation!

If you don’t know these exact numbers that I just revealed in your own unique situation then you can’t even begin to properly evaluate the financial risk of you getting sick.

Too many times, individuals and couples are confronting critical issues that affect them for the rest of their lives without any understanding of how the issues affect them personally.

They just use some “rule of thumb” that they read in a magazine, or they’re “sold” on one thought or another by a financial advisor who makes their income through sales commissions.

It all has to start with you knowing your own personal numbers first.

Once you’ve done that, then you can make educated decisions that you can feel confident with.

Evaluating a Policy for You

Let’s now assume that you’ve carefully projected out all of your retirement resources into the future and determined your true needs.

You’ve determined that you’re not comfortable absorbing 100% of this risk, and want to begin looking at long term care insurance as an alternative.

Before you approach an insurance agent or broker, become comfortable with the five main components of a long term care insurance policy.

Five MAIN Components of any Long Term Care Policy

There a five main components to every long term care insurance policy that you want to pay attention to in order to evaluate and create the most cost effective plan for you.

Each of these elements controls the cost of the insurance, so adjusting one or all of them up or down will significantly change the cost.

What I recommend you do is carefully think out all of these components and then have an independent agent present multiple combinations for you to evaluate.

  1. Maximum Daily Benefit: How much will it cost you to receive care where you live? That depends on where you live and what kind of care you will need and want for yourself. (in a nursing home, assisted living, care in your home by a private nurse, etc.) This is the amount of coverage the insurance company will pay per day, i.e. $300 per day. The higher the daily benefit you purchase, the higher the premium.
  2. Benefit Period: How long do you want to cover yourself? Benefit periods range from 2 years to lifetime benefits. The longer the period of time the insurance company pays benefits, the more costly the policy will be. (Statistics tell us that the average length of a long term stay is 2.7 years)
  3. Elimination Period: How long can you wait and self insure before benefits kick in and begin to be paid by the insurance company? This is very important. Like a deductible for homeowner’s insurance, the longer you can wait, the cheaper the policy will be. Remember, you’re trying to manage the costly ‘long term’ risk. Chances are great that you can absorb the cost of 3 to 6 months of care. Absorbing some of the short term risk saves you money.
  4. Home Health Care: Very few people I meet are lining up to receive care in a nursing home. Most people want to avoid it like the plague! So, if you’re able to and would prefer to receive care in your own home, make sure that your policy provides equal coverage for you to receive care in the privacy of your own home if you choose to do so.
  5. Cost of Living Riders: Receiving care today is costly enough. Imagine how much it will be 10-20 years down the road. To offset this, there are several cost of living riders you can choose from. The 2 main options are simple interest and compound interest adjustments. Each provides inflation protection for you, but at varying levels. Compound Interest will pay out more benefits in the long run because the inflation protection element compounds with interest. (Note: this can be as much as 50% of the cost of your premium depending on your age and the option you choose)

There are other options to consider, but these five main components will help you stay focused on what is most important when you purchase coverage.

Shared care, for example, is one of them. Under a typical policy for a husband and wife, once benefits are used up by one spouse, no more coverage exists.

With shared care, if you use up your benefits, you my “tap into” your spouse’s unused benefits thus providing you with more coverage.

I will tell you that it’s easy to get caught up with the intricacies of different policies and lose sight of what you’re trying to accomplish in the first place.

Remember that you’re looking to pass off the financial risk. Protect yourself from the risk you can’t afford to assume, i.e. the large, long term risk of care over an extended period of time.

As I mentioned above, have a complete handle on your financial situation before you enter the discussion with an agent or broker about which policy to buy.

When you do this, you remain in complete control and can act in your own best interest and save yourself a lot of time and money.

Committed to Your Relaxing Retirement,

Jack Phelps

The Retirement Coach
P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.
I appreciate the trust you place in me. Thank you!
(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)